London Fog: Out of the Drizzle and Into the Rain

THE storm clouds were already gathering a year ago for London Fog, but the venerable raincoat maker ventured forth anyway -- with an ambitious plan to reinvigorate itself.

It got drenched. And since then, if anything, things have gotten worse.

How could this have befallen a company that since its founding in 1911 epitomized the proper way to cope with improper weather? It was a victim of changing tastes, shifting markets and a spell of mismanagement.

As dress codes have relaxed, more consumers have turned to the casual jackets sold by companies like Lands' End and Eddie Bauer. Or they have adopted coats with zip-linings that can be used in all weather.

And sales of raincoats are likely to decline further, industry experts say. On top of that, many retailers have developed house-brand raincoats, which provide higher profits for the stores and lower prices for customers. The result: In 1980, the London Fog Corporation sold 1.3 million raincoats; by last year, that had plummeted to 450,000.

Mr. Cohen, who did not return calls seeking comment, is a mercurial, energetic, sometimes abrasive executive who doubled sales at the J. Crew retailing empire during his five-year reign as its president. A year ago, he was brought in with a mandate to jump start London Fog.

He changed the company's name from Londontown to London Fog and moved its headquarters from the Baltimore suburb of Eldersburg, where it was founded, to Darien, Conn., not far from his home in Westport.

In short order, Mr. Cohen closed five factories in the Baltimore area and shifted their production overseas, eliminating 1,000 jobs; whittled away at middle management and the sales staff; assembled a team of executives with impressive pedigrees in retailing, marketing and apparel manufacturing, and mounted a costly marketing campaign and new pricing strategy aimed at reviving the London Fog label and directing its lower-priced Towne brand to a younger, more price-sensitive customer.

In addition, the company merged with Pacific Trail, a maker of rugged coats and jackets, ski wear and other outdoor clothing sold in stores for the cost-conscious.

Much of this, of course, is standard revival procedure. But by all accounts, Mr. Cohen pushed too far, too fast. By the time he left in August, the company was barely breaking even on its cash flow, bankers say, and its relationships with large retailers were in a shambles.

And now, some of its banks are getting jittery. Potential investors say the banks have been trying to sell their London Fog loans, willing to take as little as 80 cents on the dollar. That is not a good sign.

"The company has just totally gone into the hole from last year," said one potential investor. "The numbers are down the tubes, and everyone is short on explanations."

Perhaps the only thing standing between London Fog and bankruptcy is the financial might of its owners, Merrill Lynch and GKH Partners, the Chicago-based investment firm backed by financial sophisticates like Melvyn Klein, Daniel Lufkin and the Pritzker family.

The owners have brought in James D. Milligan, a seasoned trouble-shooter, to manage London Fog. Their deep pockets are likely to be tapped within a few months to shore up the company. "We were all stunned by what has happened," Mr. Milligan said in an interview at London Fog's Darien headquarters. "A significant investment is needed to get us back on track."

Mr. Milligan, summing up the problems, said: "The pace of the changes was ill-timed. The business lost its equilibrium, and in a seasonal business like this, that caused a severe tailspin."

Raincoats, the mainstay of London Fog, sell best in the fall. But shifting production overseas and related labor talks led to quality problems and delays, several retailers said. Shipments often arrived late, and unseasonably warm weather also hurt sales, leading to high markdowns.

Moreover, Mr. Cohen instituted an everyday-low-price policy that barred retailers from marking coats down before Dec. 8. The company had just begun an expensive ad campaign aimed at attracting more affluent customers, and he said excessive promotions had cheapened the London Fog name.

But sales of raincoats have traditionally been driven by promotions on the three big fall holidays, Columbus Day, Veterans Day and Election Day. Analysts estimate that 90 percent of raincoats are sold at a discount.

Mr. Cohen's edict was especially galling to retailers because London Fog has more than 100 outlet stores. "He had some nerve trying to tell them not to mark down his coats when his outlet stores do it every day," said Alan G. Millstein, a fashion industry consultant. "He annoyed his biggest customers, and they decided they could live without his coats. It's that simple."

Some retailers simply bought more of the Towne line, to which the fixed-price policy did not apply. But Towne coats did not sell well, increasing retailers' irritation.

Mr. Milligan has relaxed, though not totally revoked, the ban on markdowns and is compensating retailers for losses caused by late deliveries and shoddy garments -- a necessary measure, but painful considering how short of cash the company is.

As for the manufacturing changes, Mr. Milligan said the company would ultimately have had to take those steps anyway to stay competitive. Coats made in Maryland factories, he said, cost about $18 more than those made in the Far East.

To be sure, not everything Mr. Cohen did was harmful. John Varvatos, the former president of Calvin Klein's men's wear business, who was hired by Mr. Cohen to breathe life into London Fog's design and marketing programs, has received high marks for the new ad campaign and for increasing the use of new fabrics and styles.

Until Mr. Varvatos's arrival, London Fog relied heavily on the classic trench coat, and it was perhaps the last to experiment with microfibers, the lightweight yet durable synthetics that now dominate the outerwear market. Only recently did it introduce fashion touches like quilting and hoods.

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Mr. Varvatos's experience at Calvin Klein and Polo/Ralph Lauren is also evident in the new ads, which use soft-focus black-and-white photos. Towne's ads, which are more rugged, are aimed at younger customers.

The London Fog ads are a clear pitch to a more affluent customer. With the tag line "Weather or not," they also try to sell London Fog as more than a raincoat -- a critical approach with sales slumping.

Mr. Milligan said the company would draw on the expertise it has developed through Pacific Trail, which produces a more rugged line of coats, and apply some of those strategies to its other labels. London Fog is now featuring wool coats with mouton collars and short, hooded jackets.

Pacific Trail has also given the company entree to new channels of distribution. London Fog sells almost exclusively to specialty stores and regional department stores, whose market share has been declining.

Pacific Trail sells to more price-oriented retailers like Mervyn's and Marshall's, and Mr. Milligan said the company would woo such customers more vigorously, although the London Fog label will probably continue to be sold as a department store brand.

That may require some tinkering with the outlet-store strategy. "Outlet stores have wrecked the conventional pricing structure," said Walter K. Levy, an industry consultant. Something must change, he said.

In the past, London Fog has tried extending its labels to other clothing without much success, but perhaps Mr. Milligan can do it. He was brought in by his old friend Daniel Lufkin, a founder of the brokerage firm Donaldson, Lufkin & Jenrette and a GKH partner.

GKH was shocked by the deterioration. "We certainly didn't make the investment thinking it would turn out this way," said William Goldberg, a GKH partner.

London Fog owes its banks, led by Chemical Bank, $425 million, and some potential investors who have seen the company's financial statements question why they ever allowed the figure to get that high.

In the spring, Merrill Lynch tried, and failed, to raise money for the company by selling junk bonds. Then the banks stepped in with $75 million -- on top of their $350 million in previous financing.

Three months later, the company reported that it expected its cash flow to be in the red by about $8 million, violating some requirements of its loan agreements, and some banks started scrambling to sell out.

Mr. Milligan, who has spent much of his time trying to soothe the bank group's frazzled nerves, predicts that the banks will ultimately be sorry if they sell out. "These investors," he said of GKH and Merrill Lynch, "have pretty good track records, and they're betting on this company."

But he's not promising rapid changes. In fact, Mr. Milligan and his partners at GKH are predicting that it will take a couple of years to restore sales to past levels.

"This will take more time to work out," Mr. Goldberg said. "But this will work out just fine." The company is "not out of the woods yet, but definitely on the mend."

Don't put away the umbrellas just yet. A PROVEN KNACK FOR TURNAROUND

JAMES D. MILLIGAN, brought in to revive London Fog, has spent much of his career giving old brands new life by extending their reach. The 54-year-old executive, who grew up without indoor plumbing, had his introduction to consumer products in an Owens-Illinois glass plant, where he worked to put himself through college.

He later worked as an accountant, until he was called on to restructure Borden in 1975. After that, he set about reviving the Questor Corporation, a highly leveraged company that owned the Spalding sporting goods business and Evenflo Juvenile Products.

"They were companies with the same sort of underpinnings as this one, good names that had been allowed to stagnate," he recalled. "Spalding had more problems than London Fog, and we got that back on track."

He persuaded GKH, the investment partnership, to put up $10.5 million to buy Questor and shaved 75 percent of its jobs, paring away half its businesses and building the Evenflo and Spalding names. Just 23 months later, GKH sold the business for $300 million.

In 1988, the board and senior creditors of Allegheny International hired him to put their business back on track. Allegheny, consisting mainly of Oster and Sunbeam appliances and consumer products, was in bankruptcy and the object of a now-legendary battle for control between its board and the colorful investor Paul Kazarian.

Although Mr. Milligan left after Mr. Kazarian's firm, Japonica Partners, won control, the company continued to follow Mr. Milligan's blueprint, with excellent results.

He then retired to tend to his ranches in Colorado and Arizona and his investments, doing a little consulting for Wall Street investment banks on the side. Then, in August, he got the call to come to London Fog.

He has not put his own money into his latest challenge. Instead, he said, he's invested something more precious: "My reputation.'

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A version of this article appears in print on November 20, 1994, on Page 3003005 of the National edition with the headline: London Fog: Out of the Drizzle and Into the Rain. Order Reprints|Today's Paper|Subscribe